How QIC protects its PE allocations in China

As China’s GDP growth drops to its slowest level in more than two decades, so has the domestic private equity market, but some investors have kept their faith in the country and will continue to do so.

“We look to invest in China through the cycle; we want our managers and ourselves to be patient,” Marcus Simpson, head of global private capital for Queensland Investment Corporation (QIC), told AsianInvestor.

And so the fund has struck deals slowly overall and is selective about the managers with whom it works.

“We have been investing a little bit slower over the past few years because we have a pretty high bar in terms of what we do,” he said. He noted that the 30 private equity fund managers in its portfolio were the results of a stringent screening process given that there are an estimated 9,000 managers globally.

“We have a focused portfolio, and we have known many of the managers for a number of years. Some of them we’ve helped to set up in business, and in China, many of the relationships go back for long periods of time,” Simpson said.

While the 14-year QIC veteran acknowledged the slowdown in China’s private equity market, citing a weakened participation of RMB-denominated funds, he said that QIC focuses on the nation’s thriving consumer sector.

“We’re finding that there are still many things the Chinese consumer is buying. This is less about manufacturing in China or an export opportunity,” he said, in response to AsianInvestor’s queries on whether the export drop led by the US-China trade tensions posed a threat to the private equity portfolio.

“We have Chinese companies that have recently gone public, often in the US and others lined up to be public,” Simpson said.

Having evolved from an exclusive mandate from the Queensland government, the institution now manages capital from both the state and external clients, such as local superannuation funds. Capital from the state and external clients each account for half of its assets. The AUM of the global private capital team reached A$6.8 billion ($4.8 billion), as of June this year, with a 17.1% investment return per annum as of the end of March last year.

Not only has the mandate expanded, the geographies to which QIC allocates has also gradually widened over the years.

“One of the geographies in which we are particularly active is China,” Simpson said. “We made our first investment in China in 2008. We started to look at opportunities there in the 1990s, and it took another 10 years for us to find the types of investments we wanted to make.”

A THREE-PRONGED STRATEGY

During the interview, Simpson outlined a three-pronged strategy QIC has devised to unlock China’s potential.

The first started with teaming up with China’s venture investors, who often have connections in the US, which gives the institution necessary insights into the types of companies that are being built there and in China.

“We invest with VC [venture capital] firms. A lot of those firms are ones with which we started a relationship in the US, and we grew with them as they began to grow in China,” Simpson said.

The firm then moved further into the growth spectrum to back managers that specialise in growth and buyout opportunities.

“They tend to be more local firms, firms where you have a combination of people who are very well networked into the local market,” said Simpson, adding that executives from these firms have usually spent time abroad and “have global best-in-class due diligence training and deal execution skills”.

The last prong of QIC’s strategy comes down to creating synergy between Australian companies and Chinese firms.

“In Australia, we help Australian companies grow and sometimes Australian consumer companies want to grow into China,” he said. “We will call up one of our managers and say, ‘we know you have a lot of experience in the sector, would you like to join the business in Australia where China is part of the growth story.’ We do this more and more these days.”

“Synergy for us is important particularly in investing in emerging markets, it's what we call win-win opportunities,” Simpson said.